European Research Studies Journal

Volume XX, Issue 4A, 2017

pp. 151-159

Compensation, Employee Performance, and Mediating Role

of Retention: A Study of Differential Semantic Scales

Dina Sarah Syahreza, Prihatin Lumbanraja, Ritha F. Dalimunthe, Yeni

Absah1

Abstract:

Compensation has a high effect on employee retention within a company because with
satisfactory compensation, employees will feel that the company is caring about employee
needs.

This study examines the effect of compensation on employee performance. The study was
conducted in the hospitality industry in Medan City, North Sumatra, Indonesia. A total of 200
employees from 5 hotels in Medan City were taken as sample. Data were analyzed by using
SMART PLS program.

The results show that compensation has a significant positive effect on performance;
compensation has a significant positive effect on retention; retention has a significant
positive effect on performance; retention mediates the effect of compensation on
performance.

The result of the research is expected to give different perspective and novelty to the
improvement of hotel employee performance in Medan City, North Sumatera.

Keywords: compensation, employee performance, self-efficacy, retention, hospitality

industry.

1
Dina Sarah Syahreza, Department of Management, State University of Medan, and
Sumatera Utara University, Medan, North Sumatera, Indonesia, email:
dinasarahsyahreza@unimed.ac.id
Prihatin Lumbanraja, Ritha F. Dalimunthe, Yeni Absah, Department of Management,
Sumatera Utara University, Medan, North Sumatera, Indonesia, email:
titinlumbanraja@yahoo.com ; rithadalimunthe@gmail.com ; absah_usu@gmail.com
 Compensation, Employee Performance, and Mediating Role of Retention: A Study of
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1. Introduction

Compensation has a high effect on employee retention within a company because

with satisfactory compensation, employees will feel that the company is caring about
employee needs. Employee satisfaction will be shown by the stay of employees at
the company or retention. The empirical literature has shown that the antecedent
retention is compensation (Hong et al., 2012; Astuti, 2014). In addition, retention is
also reported to have an impact on performance (Sumarni, 2011).

The results of these studies indicate that retention has a potential mediating variable
in the effect of compensation on performance. Nevertheless, it has not been the
attention of researchers compared to other variables (Dito & Lataruva, 2010;
Kiswuryanto & Djastuti, 2014). The argument is supported by Maslow's
motivational theory (1943) which in general considers that human needs are
hierarchical from the most basic needs to self-actualization.

In this study, it is assumed that granting basic rights to employees such as salaries
and the provision of health and safety facilities will encourage employees to remain
stay in the company. This is because, employees can maximize the fulfillment of
other needs such as social and appreciation to the level of self-actualization indicated
by the improvement of employee performance. This study aims to examine the effect
of compensation on performance. In addition, test the role of retention as mediation
in the effect of compensation on performance, and to test self-efficacy as a
moderator in the effect of retention on performance.

2. Employee Compensation and Performance

Compensation is all forms of financial return, services, and benefits received by

workers as part of employment relationships (Milkovich et al., 2002). Compensation
relates to the right that an employee receives from the sacrifices made to the
organization. Murty and Hudiwinarsih (2012) argue that a motivated employee will
be energetic and passionate about the tasks assigned by the company, and otherwise
an employee with low motivation will often display discomfort and displeasure with
his/her work resulting in their performance become bad and company goals will not
be achieved.

Thus, it can be said that the management of good compensation will affect the
performance of employees (Grabara, 2013). On the other hand, poor compensation
management will result in demotivation that ultimately affects the declining
performance of employees. The argument is based on Maslow's motivational theory
(1943). Maslow's motivational theory generally explains that one's motivation for his
needs is hierarchical and stratified. When the basic level of needs has been acieved,
someone will go up to the next level, to the level that is the ultimate self-
actualization. Compensation is assumed to be the company's efforts to meet the basic
needs of its employees, such as salaries, health, safety facilities, etc. With the effort
 D.S. Syahreza, P. Lumbanraja, R.F. Dalimunthe, Y. Absah

153

to meet these basic needs, it is expected to encourage employee motivation in terms

of fulfillment needs at a higher level, such as social needs, rewards, and self-
actualization. In this case, when these basic needs are met, it will encourage
employees to further improve their performance. Based on these arguments can be
indicated that the provision of compensation can affect employee performance.
Hypothesis 1: Compensation positively affects on employee performance.

3. Compensation and Retention

Yensy (2010) revealed that well-managed or properly implemented compensation in

the long run can be an effective tool for increasing employee morale. Hafanti (2015)
states that there are ten forms of compensation for employees, namely salary, job
bonus, holiday / pension allowance, family health insurance, employee involvement
in insurance program, employee recreation program, awards for outstanding
employees, and adequate leave periods. These forms of compensation are very
concerned about things that are fundamental to the needs of employees.

Therefore, the management of good compensation to employees will affect the

comfort and desire employees to stay in the organization. The argument is also
supported by Maslow's motivational theory. When the fulfillment of the basic needs
of the employees are met, they will tend to feel satisfied and choose to stay to meet
other needs such as social needs, rewards, to self-actualize within the company. This
is also supported previous research which confirms that there is significant
relationship between compensation and retention (Warner, 1981; Terera and
Ngirande, 2014; Hong et al., 2012; Astuti, 2014; Thalassinos et al., 2012; Kossova
et al., 2014).

Hypothesis 2: Compensation positively affects on retention

4. Employee Retention and Performance

Retention issues focus on the reason of employee turnover in the company (Samuel
& Chipunza, 2009). Mathis and Jackson (2006) argue that retention is the company's
attempt to keep its employees in the organization where it aims to help achieve
maximum organizational goals. Retention is a step volunteered by an organization
for creating environment eligible for the employee to survive long (Samuel &
Chipunza, 2009). Hasibuan (2009) argued that if the employee maintenance is well-
managed by the company, the employee will have the spirit of working, disciplined
and be loyal to the company.

This argument is also supported by Maslow's motivational theory that employees

who are satisfied with the fulfillment of their needs will be compelled to meet the
needs at a higher level. The efforts of the company in retaining employees to stay in
the company will further encourage employees to perform better in order of
fulfillment of higher needs. Senior employees, for example, choose to stay in the
 Compensation, Employee Performance, and Mediating Role of Retention: A Study of
Differential Semantic Scales
154

company to meet their needs in terms of self-actualization, resulting in many senior

employees who then occupy the top position because of its better performance.
Based on these arguments, it can be indicated that retention can have a positive
effect on employee performance.

Hypothesis 3: Retention positively affects on employee performance.

5. Compensation, Retention, and Employee Performance

Whitt (2006) indicates that compensation will have an impact on the high retention
of employees, which ultimately will affect the performance. Astuti (2004), Hong et
al. (2012) has confirmed the positive effect of compensation on retention. In
addition, Sumarni (2011) has also confirmed the positive effect of retention on
performance. Al-Hawari (2006) revealed that consumer retention may mediate the
effect of service quality on firm performance. In line with the idea, this study
positions employee retention to mediate the effect of compensation on employee
performance. The role of retention as a mediator in the effect of compensation on
performance has not been widely discussed in the literature.

Hypothesis 4: Compensation mediates positive influence of retention on employee

performance.

6. Retention, Employee Performance, and Self Efficiency

In social cognitive theory there are thriadic elements, i.e behavior, environment, and
individual. Specifically, Stajkovic and Luthans (1979) revealed that employee
behavior cannot be fully predicted without considering self-efficacy. Bandura (1977)
defines self-efficacy as a person's judgment on his ability to organize and act to
achieve the objectives set, as well as his efforts in assessing the extent and generality
of strength based on activity and context. Self efficacy is the intrinsic motivation that
someone has. Samuel and Chipunza (2009) argued that one's intrinsic motivation
will affect the retention of employees.

An employee's self-confidence in completing his job is believed to be a factor that

reinforces the positive effect of retention on performance. The effort of the company
(environment) in maintaining employees will affect the performance (employee
behavior) and will be stronger when there is confidence (individual) of the
employees will be competence in carrying out the task. The more personal self-
efficacy will further reinforce the positive effect of retention on performance.
Conversely, when self-efficacy is low, it further weakens the positive effect of
retention on performance.

Hypothesis 5: self-efficacy moderates the positive influence of employee retention on

the performance.
 D.S. Syahreza, P. Lumbanraja, R.F. Dalimunthe, Y. Absah

155

Figure 1. Research Model

7. Research Method

The location of this research was done in Medan City, North Sumatra. The subject of
this research were star hotels located in Medan city. The population in this study
were all employees in star hotels. The samples collected were 200 respondents from
580 the number of registered populations. The variable of retention is an
organization's attempt to eliminate intent or retain its employees. This variable was
measured by 10 instruments adopted from Kyndt et al. (2009) and Hong et al.
(2012).

Self-efficacy is a person's belief in mastering the job and can produce something
positive. This variable is measured by reference to Jones (1986). The compensation
variable was measured by reference to Hafanti (2015). There are 10 items
representing the compensation variable. Performance is the result of an employee's
job function over a certain period that reflects how well the employee meets the
requirements of a job to achieve organizational goals. Performance was measured by
4 items, namely quality, quantity, knowledge, and initiative.

The four variables in this study were measured using a 7-point Likert Scale. The data
measurement scale used in this research consists of differential semantic scales.
Differential semantic scales were developed by Osgood (1952). This scale is used to
measure attitudes or certain characteristics that a person has. Thus, it is appropriate
to measure the variables used in this study.

Convergent validity was part of the measurement model in SMART-PLS was

usually referred to as outer models. There are two criteria to assess whether the outer
models (model measurement) is eligible to construct reflective convergent validity,
namely loading should be above 0.7 and a significant p value (<0.05) (Hair et al.,
2014). Meanwhile, the reliability was tested by Cronbach alpha values. Good
 Compensation, Employee Performance, and Mediating Role of Retention: A Study of
Differential Semantic Scales
156

reliability is declared when it has a value of Cronbach alpha> 0.60 (Hair et al.,
2014). The analysis in this study was conducted with the help of SMART PLS
program.

8. Findings

Based on the hypothesis testing results in Table 2, it was revealed that compensation
has significant abd positive effect on employee performance (β= 0.122; t = 2.282;
p<0.05). This result showed that the hypothesis 1 was supported. Furthermore, the
testing result of hypothesis 2 indicates direct effect of compensation on the retention,
indicated by positive and significant value of coefficient (β= 0.232; t = 3.943; p
<0.001). Based on these results it can be concluded that the second hypothesis was
accepted. Testing result also revealed the significant and positive effect of employee
retention on the performance (β= 0.437; t = 5.963; p <0.001). Thus, hypothesis 3
was supported.

Table 1. Direct Effect Testing

Direct Effect Coefficient t Statistics p
compensation  employee
0.122 2.282 0.023
performance
compensation  retention 0.232 3.943 0.000
retention 
0.437 5.963 0.000
employee performance

Hypothesis 4 aims to test the role of retention as a mediator in the effect of

compensation on performance. Baron and Kenny (1986) suggested these four
following criteria of the stages of fulfillment of the mediation test:

Table 2. Baron and Kenny’s (1986) criteria on fulfilment of mediating variable

1 Independent variable is significant to the dependent variable
2 Independent variable is significant to mediation variable
3 Significant effect of mediating variable on dependent variable
4 Independent variable is not significant on dependent variable or the value of the
relationship is smaller after mediating variable was included. The insignificant
value implies the full mediating role, meanwhile, the smaller value indicates that
the mediator mediates partially

The testing results showed the following points:

• The variable of compensation significantly affects on the performance of

employees (β= 0.122; t = 2.282; p <0.05).
• Compensation significantly affects on retention (β=0.232; t = 3.943; p
<0.001).
• The variable of retention has significant effect on the employee performance
(β= 0.437; t = 5.963; p <0.001) as shown in the results of hypothesis testing 3.
 D.S. Syahreza, P. Lumbanraja, R.F. Dalimunthe, Y. Absah

157

• The variable of compensation has significant effect on employee

performance after being inserted the variable of retention (β=0.101; t = 2.925; p
<0.05).

Table 3. Indirect Effect Testing

Indirect Effect Coefficient T statistics P
compensation  retention 
0.101 2.925 0.004
performance
Moderating effect of self-efficacy -0.058 1.077 0.282

However, the coefficient value is smaller than the influence on the first requirement
(β=0.101< β=0.122). Therefore, it can be shown that the variable of retention
mediates partially in the effect of compensation on performance.

Thus, based on the four conditions described by Baron and Kenny (1986), it can be
stated that the hypothesis 4 was supported. Furthermore, based on Table 4, the
testing result of the role of moderating effect of self-efficacy in the effect of
retention on performance. The testing revealed that self-efficacy is not able to
moderate the positive effect of retention on the performance of the employee (β=-
0.058; t = 1.077; p> 0.05). Unlike the four previous hypotheses, the study revealed
that hypothesis 5 was not supported.

9. Conclusions

The results of this study provide additional empirical results related to how the
organization act to improve employee performance, especially on hotel employees in
the city of Medan, North Sumatra. These results indicate that the organizational
policy in terms of providing adequate compensation has a positive impact on the
performance of employees. The result is expected to contribute to practitioners in
order to pay attention to aspects of compensation and retention. The compensation
aspect may be in the form of salary which is in the nature is an organizational
liability.

Moreover, the organization needs to give rewards for outstanding employees and
promotion opportunities. In addition, retention programs should also be a concern
for practitioners to improve employee performance. In order to retain outstanding
employees, the company can focus on the efforts that make employees want to stay
in the organization. These include employee training and development, rewards for
outstanding employees, job security, and competitive salaries.

Meanwhile, self-efficacy is confirmed to have no role in strengthening the effect of

retention on performance. Future research is expected to test the role of external
factors such as culture, employee contract status, and organization as a moderating
variable to empirically test the effect of retention on performance.
 Compensation, Employee Performance, and Mediating Role of Retention: A Study of
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